Volume II No. 24 August 4, Total Bad Loans in Banking Sector Fall in 1 st Half of 2001

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1 Volume II No. 24 August 4, 2001 Weekly Newsletter Total Bad Loans in Banking Sector Fall in 1 st Half of 2001 Streamlined Securities Issuance Procedures and Strengthened Disclosure Standards FSS Introduces Enhanced Management Disclosure System for Banks FSS Announces New Software System Designed to Measure Market Risks of Banks FSC Approves Business Regulation of KSE to Handle RPs (Appendix) 1. Major Financial Statistics 2. Daily Trends -1-

2 Total Bad Loans in Banking Sector Fall In 1 st Half of 2001 A s of the end of June 2001, the total amount of loans classified as substandard or below (SBL) at all domestic banks stood at 30.2 trillion won, down 11.9 trillion won (net of a decrease of 21.4 trillion won and an increase of 9.5 trillion won) from 42.1 trillion won at the end of As a result, the ratio of SBL to total loans fell to 5.7% from 8.0% at the end of This marks the first time that the SBL ratio came within a 5% range since the Forward-Looking Criteria was adopted at the end of 1999 in an effort to more accurately classify loans. The ratio of net SBL SBL less loan loss provisions to total loans also fell to 3.1% from 4.1% at the end of The 21.4 trillion won drop in SBL during the first half of 2001 came about as a result of (1) loan write-off of 5.9 trillion won, (2) 5.3 trillion won in collateral disposition and loans upgraded to normal or precautionary from substandard or below, (3) securitization (ABS) of 4.2 trillion won, (4) outright bad loan sales of 3.5 trillion won, and (5) 2.5 trillion won in debt-to-equity swap and other dispositions. Among the 22 domestic banks, 14 banks managed SBL ratio below 6% while the other 8 banks managed SBL ratio above 6%. At the lower end, Shinhan Bank achieved the lowest SBL ratio at 2.7% and was followed by National Agricultural Cooperative Federation at 3.4% and Kwangju Bank at 3.4%. Peace Bank of Korea recorded the highest SBL ratio at 14.7% and was followed by Korea First Bank at 11.0%, and Korea Development Bank at 9.2%. As an integral part of the second stage of financial restructuring, the FSS has been actively encouraging domestic banks to reduce bad loans since the second half of 2000 and set the SBL target ratio at below 5% by the end of To achieve this goal, the FSS will continue to encourage domestic banks to dispose of bad loans and attain asset soundness. Accordingly, banks that demonstrated unsatisfactory progress with the disposition of bad loans in the first half of 2001 will be strongly urged to come up with detailed plans to meet the 5% SBL target by the end of

3 Substandard or Below Loans by Bank: December June 2001 (unit: billions won) December 2000 June 2001 Amount SBL Ratio SBL Ratio Amount (%) (%) Chohung 3, , Hanvit 7, , Korea First 1, , Seoul Bank 2, , Korea Exchange 3, , Kookmin 3, , Housing 2, , Shinhan 1, KorAm 1, , Hana 1, , Peace Bank of Korea Nationwide Banks (A) 29, , Daegue Pusan Kwangju Cheju Chunbuk Kyongnam Regional Banks (B) 2, , Commercial Banks (A+B) 31, , Korea Development 5, , Industrial Bank of Korea 1, , Export Import Bank of Korea 1, , National Agricultural Coop. Federation 1, , National Fed. of Fisheries Specialized Banks (C) 10, , All Banks (A+B+C) 42, , Note : end of period -3-

4 Streamlined Securities Issuance Procedures and Strengthened Disclosure Standards A s a way to give companies easier and quicker access to the capital markets, the FSS eased or removed a number of regulations concerning the issuance of marketable securities. The regulatory changes include greater latitude to companies in determining conversion price of convertible bonds (CB) and pricing depositary receipts (DR) for public offering, simplified registration procedures for securities issuance, and reduced fees for issuance of corporate bonds. As part of the continuing effort to improve disclosure standards and corporate transparency, the FSS also made a number of regulatory changes that will require greater corporate disclosure standards. They include more strict disclosure standards for large, publicly traded companies, mandatory disclosure of information that will materially affect the company or the investors, and other mandatory disclosures of information concerning corporate governance. The new regulatory changes went into effect on August 1, Greater Latitude for Pricing of CB and DR for Public Offering To help companies under workout or other restructuring agreement with the creditor banks more easily access the capital markets, the FSS exempted these companies from regulations that restrict the conversion price of CB and the issuance price of DR to make these securities more liquid and marketable to the investors. The FSS also lowered the conversion price floor for CB with below investment grade (below BB + ) and CB to be securitized as primary collateralized bond obligations (CBO) to 90 percent of their market value to make them more marketable. In addition, companies making overseas offering of DR may be exempted from the 30 percent floor with approval from the FSS. Streamlined Registration Procedures for Securities Issuance Securities issuers will no longer be required to file additional documents to their shelf registration statements if the information to be included in the additional documents is identical to the information already provided in the shelf registration statements or previously submitted additional documents. Under the shelf registration system, issuers pay an upfront filing fee for securities that may be offered to the investors over time. Securities issuers will now be allowed to issue their securities upon submission of any additional documents to the FSS without having to wait for an acceptance notification -4-

5 from the FSS, which used to take several days in the past. If the securities issuer filing the registration statement to the FSS has already submitted a quarterly business report to the FSS, the issuer may simply refer to the information provided in the business report for the identical information required in the registration statement to the FSS. Reduced Registration Fees for Corporate Bond Issuance The issuance fee for corporate bonds under shelf registration has been reduced from 0.09 percent to 0.04 percent of the issuance amount. The issuance fees for other bond issuance have also been lowered from a flat 0.09 percent to 0.05 percent for bonds with less than one-year maturity and 0.07 percent for bonds with maturity between one and two years. The issuance fee for bonds with maturity of greater than two years will remain at the current rate of 0.09 percent. Higher Disclosure Standards for Better Corporate Transparency Large, publicly traded companies generally those with assets of more than 2 trillion won will be subject to more strict disclosure standards when releasing information that will materially affect the company or the investors. When raising capital through privately placed bond issuance, large companies will also be required to disclose information pertaining to the private bond placement if the issuance amount exceeds 5 percent of the company s equity capital. The previous threshold for mandatory disclosure was 10 percent. The revised regulations also require more strict mandatory disclosure of the exercising prices of debt securities with options CB, bonds with warrant (BW) and exchangeable bonds (EB). The disclosure on tender offer or a takeover bid in the form of public invitation to the shareholders has also been strengthened. Those making tender offer now must disclose detailed information on the target company, its major shareholders and other interested parties, the company s subsidiaries, and the source of the fund for the tender offer. To ensure that shareholders with voting rights make informed decisions when they assign their voting rights to a proxy, those who solicit voting rights from the shareholders are now required to provide the assigning shareholders with all the updated, relevant information, including recent legal and regulatory changes regarding their rights. -5-

6 FSS Introduces Enhanced Management Disclosure system for Banks I n an effort to further improve management soundness of banks, the FSS introduced an enhanced management disclosure system that had been recommended by a special task force formed by the FSS in conjunction with the Korea Federation of Banks (KFB) and its member banks. The new disclosure system, which will be applicable beginning with the semiannual business reports covering the first half of this year, was created by the FSS and KFB in response to the increased attention of bank depositors and investors on the management status of banks following the introduction of the partial deposit insurance system in January The enhanced disclosure system reflects the proposals of the Basel Committee and is expected to improve Korea s compliance with international best practices, provide greater convenience for end-users, and increase the overall efficiency and effectiveness of the disclosure procedures. Expansion of Disclosure Requirements Under the new system, disclosure requirements have been expanded to include relevant information on the compliance officer system, net interest margin (NIM), percentage of bad loans classified as substandard or below against the total outstanding loans, and other important items. Clarification of Disclosure Criteria Moreover, to help eliminate misunderstandings regarding the preparations for disclosure, the FSS more accurately defined the meaning and scope of the required disclosure items. Unification of Disclosure Items for Semiannual and Quarterly Business Reports By unifying the disclosure requirements for semiannual and quarterly business reports, the new disclosure system will help to increase the level of understanding among depositors and investors. In addition, key data such as ROA, ROE, interest rate differences between -6-

7 loans and deposits, assets and debts denominated in foreign currencies, and business status of derivatives transactions are newly required to be disclosed in quarterly business reports. Autonomous Expansion of Disclosure Scope In addition to the required disclosure items, banks can also voluntarily disclose additional items in order to enhance understanding of the bank s unique characteristics and working conditions, which would expand the scope of information available to users of the reports. Reduction in Mandatory Display Period Due to the parallel disclosure requirement for annual financial statements on the Internet, the required display period at bank headquarters and branches will be reduced to 2 years from 3 years. Pro-forma semiannual and quarterly business reports, however, are still required to be displayed until the final annual business reports are distributed. FSS Announces New Software System Designed to Measure Market Risks of Banks T he FSS and Korea Advanced Institute of Science & Technology (KAIST) have been collaborating on a joint project to develop an integrated software system that measures risks to assets and liabilities of financial entities. In July, the FSS announced the completion of the Standard Method System, a software program designed to measure market risks, as the first stage of the joint project. The Standard Method System (SMS) incorporates the guidelines for the standardized method proposed by the Bank for International Settlement (BIS) and enables estimation of the magnitude of such market risks as interest rate risk, equity position risk, and foreign exchange risk. Until now, the ability of the FSS to use a uniform standard to assess the magnitude of the risk exposures of banks and use the risk information for supervisory purposes has been somewhat limited because of the differences among the banks in their risk measurement system. With the SMS, the FSS significantly upgrades its ability to monitor various market risks banks are exposed to and analyze the market risk information consistently for examination and supervisory purposes. -7-

8 In addition to the SMS, the FSS and KAIST are also jointly developing software systems to measure credit and liquidity risks of banks and other financial entities. When these new systems are completed, the FSS expects to have an effective, highly integrated riskmonitoring system that will significantly enhance its supervisory capability. FSC Approves Business Regulation of the KSE to Handle RPs O n July 27, 2001, the FSC approved the new business regulation of the Korea Stock Exchange (KSE) regarding repurchase agreements (RPs), or repos, that was proposed by the KSE. The new business regulation of the KSE, which is scheduled to go into effect before end-february 2002, will allow the KSE to assume an intermediary brokering role for RPs. The decision is aimed at boosting the domestic bond market, providing additional liquidity by collateralizing bonds held by institutional investors, and offering greater diversity to short-term financial markets and investors. The bonds applicable to RPs are government bonds, foreign exchange stabilization bonds, monetary stabilization bonds, and deposit insurance fund bonds and corporate bonds with good credit ratings. -8-

9 (Appendix) 1. Major Financial Statistics KOSPI Index (unit: point, percent, won) Equity Indexes Interest Rates Exchange Rates KOSPI 200 Index KOSDAQ Index Corp. Bond Yields (3 years) Gov t Bond Yields (3 years) Call Rate (1day) CD Yields (91days) Won/ USD Won/ 100 JPY July , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , Note : End of Period -9-

10 2. Daily Trends 1) KOSPI ) KOSDAQ Index ) Yields on Corporate Bond (3 Years) % ) Yields on Government Bond ( 3 Years) %

11 5) Call Rate (1 Day) % ) Yields on CD (91 Days) % ) Won/US Dollar 1,320 1,313 1,306 1,299 1,292 1,285 8) Won/100 Japanese Yen 1,070 1,060 1,050 1,040 1,030 1,

12 Main Office 27, Yoido-dong, Youngdeungpo-gu, Seoul , Korea Tel: Fax : Overseas Offices New York 14 th floor, 780 Third Avenue New York, NY U.S.A Tel : Fax : newyork@fss.or.kr London 3 rd. Floor, 1 Minster Court, Mincing Lane, London EC3R 7AA, U.K Tel : Fax: london@fss.or.kr * Frankfurt Resident Messeturm 28. OG. Friedrich-Ebert-Anlage 49, Frankfurt am Main, Germany Tel : Fax: frankfurt@fss.or.kr Tokyo Yurakucho Denki Bldg. South Kan 1051, 7-1, Yurakucho 1-Chome, Chiyoda-ku, Tokyo, Japan Tel : Fax : tokyo@fss.or.kr * Hong Kong Resident Rm , Alexandra House 20 Chater Road, Central, Tel : Fax: hongkong@fss.or.kr Hong Kong If you have any questions, suggestions, and/or comments, please feel free to contact the International Cooperation Office at (82-2) , fax (82-2) , or us at soykim@fss.or.kr -12-